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On Christmas Eve, the EU and the UK reached an agreement on a permanent free trade agreement. The agreement still needs to be ratified by both the EU and the UK. The UK Parliament is expected to approve the deal on Wednesday, December 30 and the EU leaders are expected to give the deal provisional application today. The EU parliament also needs to ratify the deal early next year, likely in February. Economists at Danske Bank believe there are still significant changes to the relationship ahead.

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Key quotes

“As expected, the deal mostly covers goods trading and only to a small extent trading in services (i.e. UK financial services firms lose their passport rights to sell services to the EU market). The agreement means that the EU and the UK avoid a cliff-edge scenario but there will still be significant changes to the trading relationship starting on 1 January, which may create some disturbances in the very near term at the borders.”

“The combination of the deal and the vaccine rollouts means the UK macro outlook for 2021 is much brighter. The deal means that some uncertainties for businesses will go away, implying higher investments after they had stagnated for some time ahead of the COVID-19 crisis. We would not be surprised if the UK economy outperforms the euro area next year. We stick to our view that the Bank of England will maintain the Bank Rate at +0.1% in the near future and will not cut into negative territory.”

“The accompanying joint declarations suggest the EU and the UK will continue discussing financial regulation with the ambition to reach a deal before the end of March 2021. They also need to reach a permanent deal on data transfers and on Gibraltar (in discussions with Spain). We also do not know how (or if at all) the UK will use its sovereignty to change its economic framework. Looking (much?) further down the road, there is the possibility of another Scottish independence referendum and a second EU referendum (in particular if the majority changes in the next election). In addition, there is a possibility to review the deal after a minimum of four years, for instance in case of too much divergence.”